The reasons for corporates deciding to spin-off parts of
their company vary greatly.

Stephen Baseby, associate policy and
technical director at the Association of Corporate Treasurers
(ACT), says: "Each business will have its own reasons for
corporate finance activity.

"Current drivers will be cleaning up
balance sheets as lenders retreat, cleaning up the remains of
prior tax-based corporate structures, but also the need for
management to show it is doing something when it may not have
exciting markets to occupy its attention."

The decision to spin-off can be driven by the need to
refocus attention on key parts of the business, in the absence
of growth, with the non-core parts that do not drive
substantial revenue or cost-sharing benefits to the overall
business most likely to be disposed of.

Baseby says: "The main benefits are removal of management
distraction on what may not be core businesses, and reduced
borrowing as lenders reduce their balance sheets and regulators
focus on deductibility of interest as they are in the UK."

The numbers involved are substantial. The
JPMorgan report showed a strong increase in the number of
separations announced by S&P 500 companies during the
period of 2013 to 2015 Q1. After hitting a low of four reported
separations during 2008-2009, it had risen to 15. This
surpasses the previous high of 12 recorded between 2005 and
2007.

The Edge Consulting Group and Deloitte
forecast that parent companies with a combined value of $1.5
trillion would execute spin-offs in 2015. This is more than
double the value of the companies that split in the previous
year.

Although it might not be the decision of the treasurers to
separate out parts of the corporate business portfolio, the
process of splitting apart their financials falls under their
remit.

Disentangle

During the M&A process, treasurers need to merge
together their existing functions with those of the incoming
company. With a spin-off, they have the opposite challenge of
having to disentangle the payments of the outgoing part of the
business from the sections that are remaining.

Baseby says: "Treasurers are an integral part of any
business’s corporate finance team and will be
engaged in detaching the exiting business and its finances from
the main business. This covers the full range of treasury
activity from recalibrating covenants to bank mandates."

It is likely in the first instance that many payments,
cash-management and treasury procedures of the new company will
be kept the same as at the parent company, including taking
members of the existing treasury workforce and keeping the same
banking partners.

The process of spinning off the division can be lengthy, as
the change has to be confirmed with each vendor on a
customer-by-customer basis. The process can take up to six
months to complete in a business-to-business environment; for
consumer-facing companies it can take even longer.

Dennis Sweeney, BAML

Dennis Sweeney, treasury solutions executive, global
transaction services, at Bank of America Merrill Lynch (BAML),
says: "When data is migrated to a replicated system, you have
to be careful that both RemainCo and SpinCo [the remaining
parts of the parent company and the newly spun off division]
have the relevant data and only the relevant data. It is not a
simple copy job.

"Some customers or vendors belong to one entity but not the
other, but in some cases customers or vendors may overlap."

Problems can often arise and Sweeney says there is always a
period of transition when receipts are still being sent to the
wrong organization.

The prior centralization of large multinational companies is
now creating a greater level of complexity when separating
organizations.

Sweeney says: "The more centralized an organization is, the
more difficult it could be to set up a standalone
company.

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